The size of the national debt is the topic of the moment. 

Rachel Reeves found a difference of some £22 billion in the day-to-day spending announced by the Tories in the spring Budget in March 2024 and what they actually expected to spend.  This implied a £22 billion increase in the national debt.  Reeves called this a black hole even though it’s an increase in national debt of only some 1% of GDP.  She assumes that the term will induce horror in a confused electorate.

Lucy Powell, the leader of the House of Commons, referring to the means testing of the winter fuel payment, claimed, in a statement bordering on the hilarious, that “If we hadn’t taken some of these tough decisions, we could have seen a run on the pound, interest rates going up and crashing the economy. It’s something we were left with no alternative but to do.”

The Office of Budget Responsibility (OBR) has produced a report talking about the ratio of national debt to Gross Domestic Product (the debt/GDP ratio) reaching 274% over the next 50 years.  The ratio is currently just short of 100%.

The House of Lords economics committee has recently completed its report into the ‘Sustainability of the National Debt’ and produced a report entitled ‘National debt: it’s  time for tough decisions’.

The premise of all these statements is that national debt is a bad thing.  All the mainstream political parties accept this premise.  Increased government spending unmatched by increased taxation will increase the national debt, as will reduced taxation unmatched by reduced government spending.  This year the Tories reduced taxation by reducing the rate of national insurance.  They left the problem of reducing spending to the incoming Labour government.  Hence, Reeves’ £22 billion black hole and her insistence on the need to cut government spending to avoid increasing the national debt.

Even the unions buy into this narrative.  The leader of Unite the Union, Sharon Graham, made an impassioned call to defend the winter fuel payment.  But her call was weak because it accepted Reeves’ premise that there is a ‘black hole’ that needs to be filled.  The headline in Unite’s paper said ‘Don’t make pensioners pay for a crisis they did not create’.  Thereby accepting that there was some sort of crisis.  But there was no crisis.  Reeves could have continued to pay the winter fuel payment.  Pensioners would have been better off.  No one would have been worse off.  National debt would have gone up a little.

This is the moment that a left wing political party could establish itself in the minds of the electorate by making a serious challenge to the whole framing, by Rachel Reeves, of the problems that the new Labour administration faces.

Rachel Reeves uses the misleading  ‘household budget’ analogy to frame her approach to managing government spending.  A household has income and expenditure.  Expenditure cannot be greater than spending unless the household can borrow money from someone else.  According to Reeves, it’s the same for the UK government.  The UK government must borrow from the private sector if it is to spend more than its income which comes from taxes, national insurance etc.  And, of course, in this framing, there is always the possibility that the private sector may choose not to lend to the government.

This framing is entirely false.  A household is a currency user.  In contrast, the UK government is the monopoly issuer of the currency.  This distinction between being a currency user and a currency issuer means that the UK government’s budget bears no relation to a UK household budget.  Understanding the distinction is crucial to taking correct decisions about government spending.  Many things follow from the fact that the UK government is a currency issuer.  A main consequence is that the UK government is not dependent in any way on the private sector to finance its spending.  It will almost certainly depend on the private sector for the products and services that it wishes to buy, but it does not depend on the private sector for the funds to buy these products and services.  As a currency issuer it has limitless funds.  This does not mean it should spend without limit.  Spending should not take place if it has inflationary consequences.

It is not the purpose of this editorial to go into the consequences of being a currency issuer rather than a currency user.  We wish, rather, to draw attention to the fact that the political party that grasps the implications of that capability will greatly increase its chances of gaining the attention of the electorate.

All the political institutions, parties, unions, think tanks will wax lyrical about poverty, equality, justice, peace etc.  But if they believe that the UK government’s spending capability is essentially the same as that of a UK household they will remain locked in the mentality of Rachel Reeves and conclude that since spending is greater than taxation then spending must be cut if an increase in the national debt is to be avoided.  They will squabble with Reeves about what should be cut, but they will not disagree that spending needs to be cut.  The electorate will be unimpressed.  

There is some small evidence that Labour have begun to grasp how politically disastrous it has been to cut the winter fuel payment.  There is no evidence that Labour understand that it was economically unnecessary.  The household budget fairytale that informs Reeves’ framing of her economic problems implies that spending cuts were necessary.  Challenging that framing should be the main task of any political party that hopes to get the attention of the electorate as a party that might make a difference.

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